News

AbitibiBowater Inc. v. Canada - Next Steps

Fri, 19 Dec 2008 19:44:49 -0500

Legislation expropriating the US-incorporated firm’s assets, rights and interests in Newfoundland & Labrador was passed into law on December 16, 2008. Abitibi-Bowater can accordingly submit a claim to arbitration under NAFTA Article 1116 on June 16, 2009, for all loss or damage it suffers as a result of the expropriation of its investments in Newfoundland and Labrador. It can provide formal notice, to the Government of Canada, of its intent to submit this claim, on March 16, 2009.

Article 1139 defines “investment” very broadly, so much so that it includes all “real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes; and interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory.” As such, all of the hydo-electric generation facilities it operates in the Province, and all of the rights it enjoys to harvest timber or which it enjoys under contract with the province for the production of electricity; or any other licenses or permits provided to it over the years, are capable of valuation by a NAFTA tribunal. The standard of compensation is prompt and effective payment of the fair market value of all of these assets, rights and entitlements of the investor. Fair market value is the price that the hypothetical, properly-informed purchaser would pay for them, in an arm’s length transaction.

Compensation for the investor will also extend to any consequential damages it suffers as a result of imposition of the Provincial Government’s measure. For example, a strong argument can be made that if the company suffers greater problems refinancing its debts because of the new controversy in Newfoundland stranding its assets and calling into question the future cash flows expected through them, losses suffered thereby would also be recovered in the NAFTA Arbitration. This prospect is especially acute given the non-transparent and high-handed manner in which the Premier appears to have acted, which may have also breached Canada’s obligation to accord “fair and equitable treatment” under NAFTA Article 1105.

As I have already noted, it is likely that Premier Williams did not chose his expropriation date arbitrarily. He seems to have selected it to coincide with the Prime Minister’s announcement of a multibillion dollar federal spending plan, to be formally implemented in five week’s time. Mr. Williams likely did so because he knows that it will be the Federal Government of Canada that is responsible for payment of the funds owing to AbitibiBowater under the NAFTA and he accordingly hopes that an expedient arrangement can be achieved between the Federal Government and the company, using a portion of those planned expenditures. If Mr. Williams’ wish comes true, he will have managed to score two birds in the hand, while charging the cost of the bush to Federal taxpayers.

I would caution Federal Government officials, however, that they must think very carefully about how they might use Federal funds announced to provide assistance to entire industries, during a serious economic recession, in order to specifically benefit one particular member of one of those industries. If it is not prudent, the Government of Canada could find itself facing additional claims under NAFTA Articles 1103, 1105 and 1106,filed by any number of AbitibiBowater’s erstwhile competitors, on the grounds that it received better treatment under the spending package than they did.

Of course that’s not a problem for Premier Williams. He is counting on the Federal Government to cover his tab with AbitibiBowater, allowing him to crow about how he ‘took it to big business’ again, while keeping the assets, rights and entitlements rightfully owing to a private enterprise for himself - to distribute as he deems most politically expedient when the time comes.

It is exactly because politicians of Mr. Williams’ ilk can be found throughout the world that there will always be need for trade and investment treaties, and there will accordingly always be work for trade and investment lawyers. Thanks again, Danny; I speak on behalf of the legal community when I write that we’re looking forward to many more happy returns from you!

AbitibiBowater Inc. v. Canada

Thu, 18 Dec 2008 02:45:02 -0500

On December 16, 2008, the Premier of the Canadian Province of Newfoundland & Labrador announced that his Government was tabling legislation in the Provincial Legislative Assembly that would expropriate all of the firm’s timber rights and hydroelectric assets once it closed its remaining newsprint mill in the province, as planned by the company for the Spring of 2009. The bill was passed into law that very same day.

AbitibiBowater Inc. is a Deleware-incorporated company whose head office is located in Montreal, Quebec. The product of a 2007 merger between Canada’s Abitibi Consolidated and the USA’s Bowater Corporation, the integrated firm is the eighth largest publicly traded pulp and paper manufacturer in the world, with operations in the United States, Canada, the United Kingdom and South Korea. It has been operating a number of hydro-electric and lumber assets in the province for over one hundred years.

Indeed, Mr. Williams took pains to quote the 1905 lease agreement between the British Crown (as the province was then still a poor, UK territory) and a predecessor corporation that was then based in the UK as well. He apparently hoped to convince onlookers that the agreement permitted the expropriation because of the company’s plans to close its currently uneconomic pulp & paper mill in tiny Grand Falls, Newfoundland. The Premier neglected to mention any of the other agreements executed between the Province and successor companies, because they would have inconveniently demonstrated how the many subsequent investments it made were not premised on any sort of promise to keep people employed at a pulp & paper plant in one small town, in perpetuity.

The case to be made under NAFTA Article 1110 is not complicated in any way. If this matter goes to arbitration, between a justifiably angry US investor and a reluctant Federal Government of Canada, it will be a damages case, pure and simple. While the State is free to expropriate the investment of a foreign investor under both the NAFTA and under customary international law, it is also obliged to pay prompt, adequate and effective compensation for such taking, normally expressed as the fair market value of all that has been expropriated.

The irony here is that the structure of State Responsibility, under both international and Canadian law, has provided incentives for the reputably combative premier to take these measures. Mr. WIlliams makes his political living by juxtaposing himself - as proxy for the entire province - in apposition to the Federal Government of Canada. As a true populist, in the mould of a Hugo Chavez, it is actually in the personal, political interests of Mr. Williams to act in so rash a manner. Not unlike the Venezuelan president to which he has increasingly been compared, Mr. Williams is neither lacking in intelligence nor too devoted to the tenants of social democracy. He just knows that he’s not the one who will have to pay the price for his perfidy.

When a provincial government acts in a manner that breaches Canada’s international obligations, it is the Federal Government that must answer for it. This means that if an aggrieved AbitibiBowater eventually launches a NAFTA claim on June 16, 2009 (which is the earliest it can do so under the treaty) it will be Federal Government lawyers who defend against it; and federal tax dollars that will be used to satisfy the damages. For a politician who rails against whomever he finds in the Prime Minister’s office, and against what he disingenuously derides as the injustices of Canada’s confederation which have ben visited upon his provincial homeland for the past five decades, there can be few circumstances as sweet.

In a nutshell, with this new measure the man just threw a grenade in the lap of his publicly-sworn enemy, Prime Minister Stephen Harper, whom he knows he can criticise regardless of whether the PM and his people can defuse the situation (through settlement) or if the matter ends in catastrophe (i.e. if the case winds up costing Canadian taxpayers dearly).

As luck would have it, however, the circumstances also bode well for a settlement. The Government of Canada is in the midst of preparing to introduce a ‘stimulus package’ worth tens of billions of dollars (in deficit financing, one might add). One of the industries promised special attention in this upcoming spending spree is none other than the forestry sector. What amazing fortune, then, that the Premier of Newfoundland & Labrador made his expropriation announcement just a couple of days before the Prime Minister would be introducing the outlines of his planned anti-recession package! Sadly, there might accordingly be very little work here for the investment treaty lawyers. No, this sounds much more like a job for the lobbyists - given that the Federal Government’s stimulus package is scheduled for January 27, 2009, over four months before a NAFTA Chapter 11 claim could be submitted.

In any event, it certainly cannot be said that Premier Williams lacks political savvy, or that he is not a quick study. After all, Mr. Williams would have been fully briefed about the workings of NAFTA Chapter 11 when Murphy Oil & Exxon-Mobil both launched their own NAFTA Chapter 11 claims against Canada in 2007. These pending claims, now in arbitration, arose out of requirements imposed by the Province upon investors in its offshore oil fields, to use local goods and services, contrary to NAFTA Article 1106. As such, the Premier understands that everything he does to foreign investors only becomes an immediate problem for the Federal Government, leaving him to reap the benefits of playing the role of the tough guy who ‘stands up to big business’ no matter what the consequences. Unfortunately there are other consequences, apart from the fiscal burden - of satisfying claims by foreign investors - that Mr. Williams would have the rest of Canada’s citizens shoulder on his constituents’ behalf.

During a period of economic uncertainty, when credit has become scarce and new investment becoming very difficult to attract, the last thing a small country, such as Canada, needs is a questionable reputation. This is a country, after all, whose Federal Government recently reneged on a solemn promise not to impose taxes on business trusts favoured by US investors in its natural resources sectors, while explicitly acknowledging that it was doing so because of the high percentage of US investment in them (at an estimated cost of $5 to $6 billion to those US investors). This is also the country whose most oil- and gas-rich province imposed a punitive new royalty regime in 2007, in order to curry popular support for its uncharismatic new premier. And yes, this is also the country where none other than Premier Danny WIlliams last year threatened to expropriate offshore oil field development rights if investors did not immediately commence development, even though the original grants did not contemplate any such thing. For good measure, the Premier also demanded that his Province receive an equity stake in any future developments of another of its more recently discovered offshore fields.

So did Canada really need another black eye in the international business press? Don’t ask Mr. Williams; to him that’s somebody else’s problem.

The Investmentclaims.com subscription site is now live in beta!

Tue, 11 Nov 2008 21:13:30 -0500

I am very happy to announce that the commercial subscription service for www.investmentclaims.com is now running in beta.

It’s a wonderful resource that will change the way we perform our research in treaty arbitration. In particular, this subscription service will offer:

• Over 300 searchable full test arbitral awards, and decisions
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• Linking from arbitrators and legal counsel to their awards

For further details of the service, please go to http://www.investmentclaims.com/subscriber_about_investment_claims where you will find details of our coverage policy and planned content enhancements during the year.

Catching Up with the NAFTA Cases

Thu, 20 Sep 2007 16:19:59 -0400

It has been a long time since my last news brief, for which I apologise. There has been sufficient activity in a number of cases lately, however, and so now appeared to be a good time to comment upon a few of them.

On the whole, Canada has recently experienced much preliminary activity in NAFTA disputes, whereas the United States has been involved with more advanced arbitrations. By contrast, Mexico has been experiencing a relative lull in ‘NAFTA action.’ I will therefore start with Canada, move to the USA and complete this edition with some time on Mexico.

Last month Canada was greeted with over $50 million in potential claims from two potential claimants. The would-be claimants were US oil companies involved in the notorious Hibernia Oil Project off the eastern coast of Canada’s tenth province, Newfoundland. As described in the identical notices of intent that can be found at naftaclaims.com, earlier this year, the Premier of Newfoundland, Danny Williams, effectively abrogated the existing arrangements involving the project and indicated that the project would not proceed without various performance requirements being adopted by the Province and accepted by all investors in it, including Mobil Oil and Murphy Oil, the would-be claimants. A prominent requirement heavily reported upon in the Canadian and international financial press included the Province being granted a significant equity stake, in addition to considerable royalty payments, to be contributed by the project consortium’s private investors. Given that a new arrangement was recently announced by the Province and its private sector partners in respect of the project, notably just prior to an upcoming provincial election, one might suppose that these two would-be claimants may not be proceeding with any NAFTA claim.

The Government of Canada has also been recently involved in negotiations involving the establishment of tribunals in four NAFTA arbitrations: Gallo v Canada; GL Farms and Adams v Canada; Chemtura v Canada; and Merrill & Ring v Canada. Tribunals have already been confirmed as having been established in two of the four, including Chemtura, formerly known as Crompton. This latter case came back to life recently, having originally started five years ago. It
concerns the question of whether the Government of Canada should pay compensation for its ban of an insecticide product, Lindane, as well as the manner in which that ban took place. It is being pursued by Canada’s leading international commercial arbitration firm, Ogilvy Renault.

Given this news, it appears that we can expect the Government of Canada to be busy in the arbitration field over the next two to three years. This period of activity follows one of relative calm, following the Government of Canada’s success in defending the long-running NAFTA claim brought by United Parcel Services concerning the actions and treatment of the government-owned postal carrier, Canada Post Corporation. By a two to one margin, the Tribunal issued a highly fact-intensive award dismissing most of the claims on the basis that some were reserved under the NAFTA and that those actions attributed to Canada Post (which favoured its own captive courier business over that of UPS and other competitors) had been undertaken under the guise of its commercial responsibilities, rather than through the exercise of delegated governmental authority, and were thus not capable of breaching the relevant NAFTA provisions concerning conduct by state enterprises. The well-written dissent, by Ronald Cass, concerned the Majority’s finding that Canada had not breached its obligation to provide national treatment to UPS, even though it was providing more favourable customs administration and enforcement treatment to Canada Post, because it was allegedly obliged to do so under international postal agreements.

As such, while the Majority’s finding was essentially ‘light’ on doctrinal explanation or guidance, the result in the case - coupled with a well-articulated dissent – suggest that the UPS award conforms with the three-step approach to national treatment taken by most international economic tribunals. That approach effectively involves determining the appropriate comparators; determining whether better treatment was conferred upon the domestic comparator; and finally determining whether there was a valid reason for such comparison. Whereas some effectively believe that this final prong should (or even “must”) involve an inquiry as to whether the less-favourable treatment was provided on the basis of, or in relation to, nationality, and it is possibly that the members of the UPS Tribunal disagreed on this point, the ratio of the case appears to fall on a disagreement as to a simple factual finding: i.e. whether Canada was obliged to provide better treatment under a different international agreement. The Majority said yes and Arbitrator Cass said no.

The Government of the United States has been busy this Autumn with two cases: Glamis Gold v. USA and Canadian Cattlemen for Fair Trade (CCFT) v. USA. I should caution that am involved in both cases (as advisor to counsel for the amicus in the former and as co-counsel in the latter. I should also mention that I was involved as a member of the counsel team in UPS v Canada many years ago, but ceased working on it around May 2000.

The CCFT claim proceeds to a hearing on jurisdiction early next month. Given the circumstances, it would be inappropriate to write about it at this time. Those interested in the arguments can find them at naftaclaims.com.

The Glamis case involves allegations of a breach of the NAFTA ‘minimum standard’ provision and failure to pay compensation for indirect expropriation. Final hearings were conducted last month and earlier this week. I will again caution that I have an obvious ‘favourite’ in the dispute, which is why I am choosing to devote so much of this new brief to it. The case is effectively about whether the burden of understanding and respecting the cultural context into which an investment has been proposed falls upon the investor, the host State or both?

In this case, the cultural context is characterised, in part, by the existence of an historic, religiously sacred trail with associated ceremonial features on the traditional territorial lands of the Quechan Indian Nation, whose exact location - because of its very nature as sacred - had always been held in strict confidence by the Tribe to protect it from inadvertent or intentional desecration. The investment would have been an open pit cyanide heap leach gold mine that the Quechan have consistently argued would have destroyed portions of their sacred Trail of Dreams and other religious properties.

The Claimant has basically alleged that it was entitled to rely on a governmental approval process set in place by the Bush Administration which over-ruled a Clinton Administration approach that would have denied approval to construct and operate a mine on the site. The claim was brought after the California State Government imposed a complete backfilling requirement that Glamis has claimed effectively destroyed the value of the property rights it had in the proposed mine.

Glamis pointed to a later governmental decision to approve a natural gas pipeline, which impacted areas of other trails, for which tribes, including the Quechan, had expressed concern, but not the same great level of concern for religious beliefs as the proposed mine site. The company pointed to the Bush Administration's approval process, and past practice regarding mining regulation federally and in the State of California, as a ground for its entitlement to hold a legitimate expectation to carry on with its project without having to comply with the State Regulation, which it claimed was expropriatory and discriminatorily directed at it and its investment. The gist of its argument was that the Quechan Tribe’s objections could not be a valid basis upon which to prevent the investment from proceeding.

Rather than picking up on one of the Quechan's arguments, contained in an amicus brief filed with the Tribunal, that the USA (at all levels of government) is obliged under customary international law to protect the sacred places of indigenous peoples living within its borders, the primary thrust of the Respondent's argument was that Glamis had failed to prove that detrimental reliance on legitimate expectations formed on the basis of a host State’s regulatory framework is even a ground of responsibility under customary international law minimum standard of treatment it says is codified with Article 1105. It further argued that the Claimant had failed to prove expropriation (under NAFTA Article 1110) because the State Regulation did not, in fact, substantially interfere with the proposed investment and that Glamis failed to take the necessary steps to proceed under Federal Law, thus rendering the claim insufficiently ripe for the Tribunal’s consideration.

At any rate, it is not clear why a separate claim for breach of Article 1105 was brought in this case, given that the expropriation provision, Article 1110 specifically refers to treatment in accordance with Article 1105 and due process, specifically, as part of the evaluation of a taking and that the Claimant did not appear to pursue a separate damages theory apart from a fair market value for destruction of the investment opportunity. Numerous other investment treaty tribunals have concerned the issue of legitimate expectation as part of their analyses of regulatory takings claims, rendering the issue redundant in a case, such as this, where the only claim is effectively for the destruction of the investment.

Finally, although I am a well-known proponent of investor-state arbitration, I must admit that this is a case which may truly demonstrate the serious, potential weaknesses of this kind of dispute settlement as a vehicle of international public policy. This is a case where the interests of a sovereign indigenous nation cannot be fully represented in an international dispute over sacred land protected under customary international law, and as so very recently recognized by the General Assembly of the United Nations, with its Declaration on the protection of the property rights of indigenous peoples. As the dispute was launched by a private party seeking damages from a State for the breach of a treaty, and as the claim was based, in part, on the investor’s alleged reliance upon a Bush Administration decision to over-rule a Clinton Administration decision to respect the sovereign rights of these indigenous peoples to preserve their sacred lands, it seems highly inappropriate that those same indigenous peoples have no direct right to participate in the proceeding. Rather, they could only participate, as amicus petitioners, at the discretion of the Tribunal and the parties 9one of whom wanted to conduct extensive mining operations on the site and the other that must act under the direction of the same Administration that attempted to facilitate those wishes – without even requiring the remediation later imposed – and appropriately so – by the State Government of California).

Other news from the United States involves a pending challenge, by the Respondent, to the service of celebrated international human rights scholar, Professor James Anaya, on the Tribunal hearing the Grand River Enterprises et al v USA case. While this case is proceeding under the UNCITRAL Arbitration Rules, as the NAFTA designates the Secretary General of the ICSID as the appointing authority for NAFTA arbitrations, the challenge is being entertained by ICSID officials. Because I serve as co-counsel in the case, I will not write further about the challenge proceeding. Those interested may review the submissions made by the parties and the challenged arbitrator at NAFTAClaims.com.

The Grand River arbitration is currently in the document production stage, with the Tribunal having issued a decision on jurisdiction late last year. That decision dismissed certain of the investors’ claims as time-barred while maintaining others. The case involves , the sale of tobacco products by the claimants in the USA that have been subjected to various measures employed by most US state governments as part of an agreement with other tobacco companies, especially the largest manufacturer/marketers, with whom the claimants are in competition. The claim proceeds in respect of all measures applied to sales of the claimants’ products made on sovereign indigenous lands and in respect of only certain measures applied more recently to sales of the claimants’ products by an exclusive non-indigenous distributor in a smaller number of specific state markets.

The final, interesting procedural development involving a NAFTA claim against the United States Government is that of the Consolidated Softwood Lumber proceedings. A very long and detailed award was rendered in which a significant costs award was made in favour of the United States in Respect of one of the three claimants. The other two and the United States had agreed that each would be responsible for their own costs. While it appears that costs awards are very fact-dependent, some of the reasoning in this decision nonetheless suggests that there is a segment of the arbitral community that no longer wishes to see investor-state arbitrations treated more like judicial review proceedings are treated in my country (i.e. where the public interest apparent in having such proceedings transpire is believed to be served best by only awarding costs in rare cases where the circumstances warrant, thus preventing a prohibitive ‘costs-chill’ from being imposed on all but the most deep-pocketed of potential claimants).

I should note that I served as an advisor for two of the claimants in an earlier stage of the Softwood case, but not the one against whom the costs award was made. I must also note that I was involved as co-counsel in another NAFTA case in which a large costs award was rendered against the claimant, in absence of any finding of sharp or inappropriate practice in respect of that arbitration. The case was International Thunderbird Gaming v Mexico. I was not involved in the judicial review proceeding that ended with the award being upheld by a US court, but the result is notable because it was the first US court to entertain and dismiss an annulment application on the merits. A copy of the Court’s reasons for decision can be found at naftaclaims.com.

There is not much other news from Mexico. I hear that cases involving the long-standing sugar dispute between the US and Mexico (which includes investor-state claims) continues, but I have little information about the proceedings – which do not appear to be proceeding in as transparent a manner as are most of the other cases against the Canadian and US Governments. This may be owing, at least in part, to the fact that these cases were established before it became politically unpalatable for either claimants or respondents (and it depends on the facts of a case as to who is most interested in confidentiality) to publicly eschew a fully transparent proceeding.

This past summer, another NAFTA Tribunal also issued an award in favour of Mexico. The case concerned the claims of a group of Texas business people who claimed rights to the use of water flowing from international agreements between the USA and Mexico, in respect of how Mexico was allegedly obliged to manage consumption of certain watersheds in Mexico. These alleged water use rights were considered by the claimants to be intangible property akin to investments in the territory of Mexico. The Tribunal determined that these water usage rights could not constitute investments in Mexico and therefore dismissed the claim. Faced with pre-hearing questions from Tribunal indicating the likely outcome of the case, the claimants also made arguments at the hearing (and in post-hearing submissions) that they were entitled to receive both national treatment AND fair and equitable treatment regardless of where their investments were located (i.e. not in Mexico). On this point the Tribunal held, in a nutshell, that because the investors had brought their claims in respect of how Mexican Government actions related to their investments under NAFTA Article 1101(1)(b) - as opposed how the measures related to them as investors under NAFTA Article 1101(1)(a) - it was simply not open to them to seek protection for their investments (under the applicable national treatment provision or the minimum standard of treatment required under customary international law and Article 1105), if those investments were not located in the territory of Mexico.

The only other interesting development concerning Mexico recently was the issuance of an award in favour of Mexico in the Fireman’s Fund case, which only became available – in redacted form – this past summer. The case involved financial services measures and thus was restricted by the Tribunal, albeit on the facts of the particular case, to a claim for compensation for expropriation. The Tribunal essentially found that while the treatment received by the claimant was discriminatory, the claimant was precluded from brining a claim for discrimination alone – and that without proof of substantial interference, as required for a finding of expropriation, its claim would fail. The redacted copy of the award can be found on naftaclaims.com.